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529 plans may soon cover more college expenses

The rules governing 529 college savings plans may soon become more flexible.

Last week, the House of Representatives passed a bill that would expand the benefits offered by the college savings plans to include coverage of expenses like computers and Internet access.

The bill came together in the wake of a controversial proposal from the White House to curtail the tax benefits of 529s. That plan got serious blowback from many quarters and it was tabled within a week.

White House press secretary Josh Earnest said the administration won't stand in the way of the House bill, which garnered strong bipartisan support. And there's a fair chance it could pass in the Senate too, since an identical bill was introduced with a bipartisan roster of co-sponsors.

The House bill changes two provisions that will benefit families who use 529s.

First, it would let people use money from a 529 to pay for the purchase of a computer as well as software and Internet access so long as it's used by the student for his or her education at an eligible school.

That may seem like a no-brainer given how critical computers and Internet access are to students' lives these days. But under the current rules, 529 withdrawals may only be used to buy equipment "required for enrollment or attendance." And computers, software and Internet access don't always meet that criteria, unless one is pursuing an engineering or technology-related degree, according to Mary Morris, chair of the College Savings Foundation.

They actually were considered eligible expenses in 2009 and 2010, thanks to a temporary provision approved by lawmakers. But that provision was allowed to expire.

The House bill would also let the account holder recontribute money tax-free to a 529 if that money is refunded from a college or university because the student falls ill or otherwise has to drop out of school for a time.

The only restriction the bill imposes is that the refund must be reinvested into the 529 savings account within 60 days of the refund date.

Today, if a refund is reinvested, it would first be subject to income tax and may also be subject to a 10% penalty.